The Form 1040-ES package includes worksheets to help you account for differences between the previous and current year’s income and calculate the tax you owe. ![]() Look at the taxable income, tax paid, credits and deductions from the previous year and compare to the current year’s numbers. To help with the estimation, you can start with the previous year's federal tax return. The calculation is based on an estimate of current income. You should also pay the quarterly tax in a timely fashion, or you may find yourself subject to a penalty for a particular quarter because the tax was received late, even if you overpaid the total tax due for the year and are eligible for a refund. You need to pay a sufficient amount when you make your payments. The requirement for making estimated taxes has both timeliness and amount elements. If you end up overpaying, you can receive a tax refund at the end of the year or carryover the excess amount to help pay the estimated taxes for the next year. In many cases, as long as you pay 100 percent of the previous year's tax, you won’t be subject to the penalty. ![]() To avoid this penalty, you can use your previous year’s taxes as a guide. As such, it is possible to underestimate, resulting in an underpayment and penalty. ![]() The estimated tax payment is based on an estimation of your income for the current year. If you have any of theses types of income coming in, then you might need to pay estimated taxes during the year. Earnings from interest, dividends and rent, taxable unemployment compensation, retirement benefits and the taxable part of your Social Security benefits are other examples of income that often does not have tax withheld at the source. Independent contractors and freelancers, for example, typically do not have tax deducted from their pay. Not all taxable income is set up so that taxes are deducted at the source.
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